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Doing Business in Russia

Contributed by Jeremy Hetherington-Gore
11 May, 2010

This section of the Lowtax.net Russia site is aimed at newcomers to Russia who want an idea of what it might be like to start and run a business there, and perhaps live there, or at any rate visit on a regular basis. Perhaps no other foreign destination has given rise to so many myths - both good and bad - and we aim to describe the reality behind the hype, based on the experience of our own staff members who have lived and worked in Russia for nearly ten years.

Most incoming foreign investors will spend their time primarily in Moscow or St Petersburg, and it's Moscow that we will focus on. In many ways Moscow is different from other parts of Russia, particularly in terms of the way of life, although business practices and the pervasive influence of the State are just about the same everywhere.

Russian Travel

For most Westerners arriving in Russia, their first experience of the country will be Sheremetevo 2, the international terminal of Moscow's biggest airport, which has remained largely unchanged except for some superficial tidying-up since 1990. Baggage is delivered quite promptly, but the key feature of arrivals is the passport queue. Nowadays it is often mercifully short, but it's unpredictable - up to 2 hours on a bad day - and it's a good idea to be first off the plane, and don't hang around on your way to the immigration area. Try to size up the situation quickly, and pick the shortest queue - if there's one queue for two booths, that's the one to pick. Then be aware that additional booths may open, and dash quickly to the new queue if one does. If you see an immigration office holding a rubber stamp, that's a sign that a new booth will open.

Once through the controls - use the green customs channel if you have less than USD10,000 and nothing special to declare - you're probably being met, but if not you'll need to get a taxi. They'll swarm around you, and they're quite safe. Bargaining is very much in order, and they'll take dollars. Sometimes it's possible to change money at Sheremetevo, but it's not guaranteed, and don't trust anyone other than a bank. You'll be able to change money at your hotel.

If you're up for it, it's just as quick and much more interesting to take a Mashrutka - the Russian equivalent of an American limo. They run all over Russia, and charge very little. From Sheremetyevo, there are Mashrutkas to the nearest metro station, Rechnoy Vagsal, for 20 roubles, and once on the metro (a flat 10 roubles) you can go anywhere in Moscow. The metro is fast, reliable and clean - and there are good metros in many larger Russian cities.

As well as the metro and Mashrutkas, Russia has buses, trolley-buses and trams, depending on where you are. All are fine, but crowded in the rush-hour. As a business visitor, of course, you are more likely to have your own driver, or use taxis. In Russia there are very few actual taxis, but on the other hand all cars are taxis. You just stand on the street and hold your hand out until a car stops, then discuss destination and price with the driver. Scary at first, but easy once you're used to it! Hotel cars are fine, obviously, but will cost ten or twenty times as much.

Outside Moscow, there are suburban and inter-city rail services which are quite reliable and cheap. People often prefer the train to go from Moscow to St Petersburg, for instance. Russia is so enormous, however, that air travel is the normal way of getting around the country. The safety record is pretty good, in fact, now that children aren't allowed in the cockpit any more, and Russian engineering is excellent, whether you're talking planes, trains or tanks. Clunky, but reliable.

The Visa Problem

If you are an occasional visitor to Russia and stay in hotels, there isn't a problem: the hotel will register you, anywhere in Russia. It's when you visit frequently and stay privately, perhaps have your own apartment, that the problems start. You'll probably have a multiple entry visa, which will have been obtained for you by the travel agency, and when you arrive in Russia you have three business days to register yourself. The rules constantly change, and the official registration offices (the dreaded OVIR) are to be avoided at all costs. Instead, you are advised to use a private registration agency, perhaps affiliated with your travel agent, who will need your passport, entry document, and a notarised declaration of residency. They'll give you a 'spravka' which confirms that they have your passport, in case you need identification in the meantime. The process takes a week, give or take, and after all that you may find that the OVIR has given you only a one-visit registration, so that you have to go through the whole process again next time. If you're in luck, they'll give you six months, but the old days of a year-at-a-time seem to have gone for ever. If you move around inside Russia, you should theoretically re-register in every new location after the statutory three days - but at least that's likely to be a hotel.

Russian law is very prescriptive, and lays down extremely precise penalties for every eventuality, so if you are unfortunate enough to be caught with an incorrect spravka, or no registration at all, you are liable for a fine. Russia being Russia, what actually happens is that the police ('militsya') offer you a choice between a protocol (prosecution) and paying an on-the-spot fine (= ahem, something else). Of course, you pay the fine. Neither the police nor you want a protocol, which is very time-consuming and unprofitable for all concerned.

If you're planning a more permanent residence in Russia, then there are longer-term registration options, which are preferable, but of course involving massive bureaucracy.

Running a Business

The process of actually starting a business is dealt with from a legal perspective on the Forms of Company page. But you are not advised to try doing it yourself, unless you speak reasonably fluent Russian and have studied the legislation. The easy option of course is to use a Western accounting or legal practice to do all such stuff for you. They are all represented in Moscow, and will be very happy to navigate the shoals and rapids (slows would be a better word) of Russian bureaucracy on your behalf, but, oh boy, will you pay! And you need to know that the work will actually be done by Russian para-legals toiling away downstairs in Dickensian (Gogolian?) conditions while you sip expensive coffee with the client manager around a German mahogany table.

So it is better, if you are not a multinational about to enter a PSA with Yukos, to find an English-speaking Russian firm to work with on legal and tax issues. Even better (in fact, the only best way) is to find an English-speaking Russian chief accountant lady (they are all female) to 'do' for you. She will handle the registration agencies, the pension fund, the tax authorities, and every other Russian public or private type of shark that you can imagine. She will be worth her weight in gold.

Everything however is not unrelieved gloom. Russians as employees are basically wonderful, and if you have a permanent office then just as soon as you can you should replace expensive expatriates with qualified Russians in your business. By nature, Russians are flexible, inventive, energetic, resourceful, and humorous, and this is especially true of those Russians (usually young) who have decided to learn English and become qualified in a discipline that would be needed by a foreign company. Actual day-to-day business affairs are not that different from those in the West, if perhaps a little more bureaucratic, but definitely less politically correct. Invoices are issued, they get paid (usually by bank transfer), a sandwich trolley comes round, all the office equipment is Western, telecommunications are efficient and quite cheap, everyone has mobiles, and so on.

Running a business brings up the subject of the 'mafia'. The idea of the Russian 'mafia' is now so deeply rooted in business mythology that the prosaic reality comes as a surprise to most people. First, it isn't a branch of the Italian mafia, but a home-grown network of criminal gangs, often with Chechen or Georgian origins, which flourishes in the dark spaces where the official writ doesn't run. In fact, that means almost everywhere, in the sense that the underpaid Russian police (militsya, again) don't provide much of a shield against crime for law-abiding citizens or businesses, and this vacuum is occupied very effectively by the criminals, who do actually provide a real service.

In Russia every business needs a 'roof' (krysha) and that means protection of some kind. Banks and other rich organisations have their own gun-carrying security guards and bodyguards; more ordinary businesses are likely to be approached by whichever gang controls the street or building in question, and protection will be offered. Bargaining is possible, and the end result may well be not that much more costly than local business taxes in the West.

It is pointless and dangerous to refuse the criminals offering protection, if you don't have your own security. There are of course many cases in which Russians (and a very few Westerners) have been eliminated by a hit-man ('killer' in Russian, as if they didn't have any before 1990!) but invariably this is because of a quarrel in which one party has refused, rightly or wrongly, to compromise. This won't happen to you if you behave normally.

Business disputes, other than those involving criminals, can be taken to the courts, as in the West. There are special Russian business courts called 'arbitrazh' courts, and at least where major political interests are not involved, these courts have a record of objective fairness to litigants. The problem in Russia is not the courts, it's getting a judgement enforced, because the bailiff service is vestigial. Most normal Russian companies in fact accept the jurisdiction of the courts, so if you're lucky, the enforcement problem won't arise.

Negotiating with Russians

Many business-people setting up or investing in Russia will have Russian partners or counter-parties, with whom there will need to be a contract. Westerners are often surprised by what can happen during a contract negotiation process in Russia, and it is definitely one of the ways in which Russia can seem very different from the West. It's hard to put a finger on exactly why it should be so, but perhaps because of centuries of having to dodge an authoritarian state, Russians can be very hard to handle in a negotiation. Nothing is quite what it seems, and a Westerner will need enormous reserves of patience, cunning and resourcefulness to succeed in a negotiation (these are exactly the qualities Russian negotiators display).

Winston Churchill said about Russia, after long experience of negotiating with Russians: ' I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.' Allowing for the different circumstances, this is a good description of how you may feel after a Russian negotiating session.

The best advice to give an inexperienced Western negotiator is to have a Russian on your side, perhaps by using Russian professionals in an advisory firm, or some other contact who can be relied upon and has local knowledge. Russians play to win!


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